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Office Depot's Earnings Miss Estimate

Amid a sluggish economic environment, Office Depot Inc. (ODP) posted breakeven bottom-line results for the first quarter of 2013 that fell short of the Zacks Consensus Estimate of 5 cents and went down significantly from the year-ago earnings of 11 cents. Soft top-line performance muted the company’s cost containment efforts.

Including one-time items, Office Depot slumped to a loss of 6 cents a share compared with earnings of 14 cents registered in the year-ago quarter.

Office Depot’s total revenue of $2,718.3 million decreased 5.4% (both in constant currency and U.S. dollars) from the prior-year quarter and also came below the Zacks Consensus Estimate of $2,783 million.

The company stated that shift in the timing of the New Year and Easter holidays negatively impacted sales by approximately $58 million or 200 basis points year over year. .

Despite a 5.5% decline in cost of goods and occupancy costs during the quarter, gross profit dropped 5% to $659.7 million. However, gross margin expanded 10 basis points to 24.3% in the quarter.

Office Depot reported adjusted operating income of $34.2 million down from $56 million in the year-ago quarter, whereas operating margin shriveled 60 basis points to 1.3%.

Office Depot witnessed sales decline across technology peripherals, while shift in consumer demand into tablets negatively impacted the sales of laptops. Sales of Copy and Print, and cleaning and breakroom supplies rose, though it fell for office furniture and supplies. Management stated that customer transaction counts dropped 5%, while the average order value declined marginally.

The division reported an operating income of $15 million, down 17.1% year over year, while operating margin contracted 20 basis points to 1.3%.

Total store count at the North America Retail division stood at 1,111 at the end of the quarter. During the quarter, the company closed 1 store and relocated 4 stores.

Revenue for North American Business Solutions decreased 1% to $815.7 million. Both direct and contract channels sales declined during the quarter. The division posted operating income of $25.3 million up from $22 million in the year-ago quarter. Operating margin expanded 40 basis points to 3.1% year over year.

The International division’s revenue dipped 8% to $758.7 million, whereas it fell 9% in constant currency. The overall sales in the European contract channel dropped in the mid-single digits as the growth witnessed in Germany was offset by soft sales in other countries. Asia contract channel sales increased marginally. European direct channel experienced a sales decline but the rate of fall decelerated sequentially. The retail channel sales slipped in Europe due to softness witnessed across Sweden and France.

The division posted an operating income of $4.8 million, up significantly from a loss of $2.1 million in the year-ago quarter. At the end of the quarter, total store count at the International division stood at 124. During the quarter, the company opened 1 store.

About the Merger

Office Depotand OfficeMax Incorporated (OMX)decided to merge their businesses in order to better compete with the industry bellwether, Staples Inc. (SPLS)and online rivalssuch as Amazon.com Inc. (AMZN). The decision augurs well for both the companies, which have been grappling with soft sales.

The all-stock merger agreement, which involves 2.69 Office Depot shares for each share of OfficeMax, would resultin cost synergies of $400 to $600 million yearly by the third year from the time of closing of the transaction. The transaction is expected to be concluded by the end of 2013.

Other Financial Details

This Zacks Rank #5 (Strong Sell) company ended the quarter with cash and cash equivalents of $549.3 million, long-term debt of $479.8 million and shareholders’ equity of $635.5 million, excluding non-controlling interest of $115,000.

Net cash used in operating activities was $93.9 million from operating activities, while capital expenditures were $28.6 million, resulting in a negative free cash flow of $122.5 million.